adapt coffee talk featuring baker tilly · 2020-05-28 · industry insights, technology solutions...

ADAPT Coffee Talk featuring Baker Tilly

Selling your practice in the COVID-19 era: advice from accounting experts

May 15, 2020

Agenda

2 Office and procedural policies to evaluate and update

3 Documents to prepare for prospective buyers

4 Valuation concepts and methodology

1 Introduction

5 Financing and other considerations

ABOUT BAKER TILLY

Members of the world’s 10th largest network of

accounting and business advisory firms

Major offices in Janesville, Milwaukee, Madison, Appleton and

Minneapolis

TOP

15

One of the 15 largest accounting and advisory firms

in the U.S. according to Accounting Today

3,800+ employees405 partners / 1,200+ CPAs

Recipient of several national and regional awards including 2018 Best

Workplaces in Chicago

Dental specializationABOUT BAKER TILLY

With a dedicated dental services team, Baker Tilly Advantage leverages our large firm capabilities combined with our personalized service approach to provide more than 350 dental practices with industry insights, technology solutions and outsourcing and advisory services including tax, accounting, payroll, valuation, transition planning, projections, operating effectiveness and consulting.

We often work with dental practices to:

- Provide valuations, transition consulting for buy-in / buy-outs, buy – sell agreement negotiation and advisory

- Provide bookkeeping and accounting services driven with best practice technologies

- Provide proactive tax planning that minimizes tax exposure at the federal, state and local levels

- Provide industry insights, dashboards and CFO level advisory

- Provide practice management consulting geared toward enhancing and protecting your value

Industry focus

Baker Tilly is a founding member of the:

— Office employment policies— Office policies review in post-COVID environment

— Patient check-in policies— Payment policies— Collection procedures— No call/no show fees

— HIPAA and regulatory compliance (CDC, OSHA, Medicare, if applicable)

— Benefit agreements (Health insurance and retirement plans)

Office and procedural policies to evaluate and update

— Hygiene protocol (Post-COVID-19: how long will you allow and what impact will that have on your practice production?)

— Scheduling (spacing / appointment times)

— Standard industry practice vs. Individual owner best practices

— Non-compete changes, if any

— Buy/Sell Agreements updated?

— Defined valuation formulas updated?

Office and procedural policies to evaluate and update (cont.)

— Confidentiality and HIPAA release documents

— Current financial statements

— Tax returns (last 3 years)

— Adjusted normalized cash flows:— Discretionary expenses— Excess rent— Benefits— Vehicle— Unnecessary supplies; Office vs. dental supplies— PPP or other loan stimulus funds separated— Specialized PPE

Documents to prepare or update for prospective buyers

— Production by providers (Doctors and hygiene)

— Fee schedule

— Insurance vs. fee for service

— Active patients for 18 / 24 / 36 months

— New patient history for last 2-3 years

— Equipment listing / depreciation; major purchases that may have been expensed listed

— Practice and building separate, if applicable

Documents to prepare for prospective buyers (cont.)

— Accounts receivable aging summary (collection ratios and procedures post-COVID-19)

— Referral patterns

— Current lease structure – appropriate for transition plan; banks will generally require 5-10 years, options for renewal

— Employment or non-compete agreements, if applicable

— Sole practice vs. partnership differences may be applicable

— Schedule history

Documents to prepare for prospective buyers (cont.)

Practice Valuation ConceptsPRACTICE TRANSITIONS

Valuation Models:- Asset Model- Net Production/Collection Model- Capitalized Excess Earnings Model- Net Annual Earnings Model- Patient Records Model ($150 – $500 per record)- Discounted future cash flow – (post Covid-19 analysis)

GENERAL DENTAL

GROSS PRODUCTION 1,800,000$

LESS: WRITE OFFS AND ADJUSTMENTS 15% (270,000)

NET PRODUCTION (COLLECTIBLE PRODUCTION) 1,530,000

LESS: OVERHEAD 60% (918,000)

NET AVAILABLE TO DOCTORS 612,000

LESS: DR EARNINGS (DR PROD LESS LAB) 35% (322,875)

OWNERSHIP PROFITS 289,125

LESS: PRACTICE DEBT $1,020,000 7 YEARS, 6.0% per month 14,827 (177,924)

OWNERSHIP PROFITS 111,201$

GENERAL DENTAL DR COMPENSATION CALCULATION

DR PRODUCTION (75% OF TOTAL) $1,200,000LESS: WRITEOFFS AND ADJ 15% (180,000)LESS: LAB (97,500)NET DR. PRODUCTION 922,500

TIMES 35% 322,875$

DENTAL PRACTICE PROFIT MODEL


est of value

PAINLESS DENTISTRY ,DDS , PA

Estimate of Practice Value

December 31, 200X

METHOD 1 - ASSET VALUELowHigh

Dental equipment -$150,000$150,000

Office equipmemt and furniture10,50010,500

Leasehold improvements20,00020,000

Dental supplies & hand instruments15,00015,000

Accounts receivable110,000125,000

Patient records/goodwill490,000765,000

Total value$795,500$1,085,500



December 31, 200X

METHOD 2 - ANNUALIZED NET PRODUCTION (Weighted Ave)

12/31/xx$1,100,000times 1$1,100,000

12/31/xy1,350,000times 2$2,700,000

1231/xz1,530,000times 3$4,590,000

6$8,390,000

divide by 6$1,398,333

Average annual net production $1,398,333

Total value$769,083$1,048,750

55%75%



December 31, 200X

METHOD 3 - CAPITALIZED EARNINGS

Average annual net production-(from above)$1,398,333

Less: Average operating expenses60%(839,000)

Professional labor (38% of net Dr.prod after lab)(350,000)

Equipment contribution(25,000)

Excess Earnings$184,333

Capitalization Rate20%16%

(5 times)(6.25 times)

Total value$921,667$1,152,083

1



December 31, 200X

METHOD 4 - ANNUALIZED EARNINGSLowHigh

Total earnings(amt available for doctors)

12/31/xx$420,000

12/31/xy$520,000

12/31/xz$650,000

Total earnings for the above years$1,590,000

div by 3

Average annual earnings$530,000

22.5

Total value$1,060,000$1,325,000



December 31, 200X

Average value of the four methods presented

Method 1$795,500$1,085,500

Method 2769,0831,048,750

Method 3921,6671,152,083

Method 41,060,0001,325,000

Total of the four methods presented$3,546,250$4,611,333

div by 4div by 4

Average of the above valuation methods$886,563$1,152,833

Calculated value (average of low & high)$1,019,698

Other Balance Sheet items at 12/31/0x

Cash$20,000

Accounts payable(2,500)

Payroll withholdings payable(7,500)

Notes payable(100,000)

Current year profit0

Net total($90,000)

Net value929,698

Net value-rounded930,000

2

$135,653

$162,807

$161,763

$460,223

$153,408

profit model



December 31, 201X

DENTAL PRACTICE PROFIT MODEL

GENERAL DENTAL

GROSS PRODUCTION$ 1,800,000

LESS: WRITE OFFS AND ADJUSTMENTS15%(270,000)

NET PRODUCTION (COLLECTIBLE PRODUCTION)1,530,000

LESS: OVERHEAD60%(918,000)

NET AVAILABLE TO DOCTORS612,000

LESS: DR EARNINGS (DR PROD LESS LAB)35%(322,875)

OWNERSHIP PROFITS289,125

LESS: PRACTICE DEBT $1,020,000 7 YEARS, 6.0%per month14,827(177,924)

OWNERSHIP PROFITS$ 111,201

GENERAL DENTAL DR COMPENSATION CALCULATION

DR PRODUCTION (75% OF TOTAL)$1,200,000

LESS: WRITEOFFS AND ADJ15%(180,000)

LESS: LAB(97,500)

NET DR. PRODUCTION922,500

TIMES 35%$ 322,875

comp formula

PAINLESS DENTISTRY, DDS, PA

COMPENSATION FORMULA

FOR THE 12 MONTHS ENDED DECEMBER 31, 200X

PRACTICE VALUE=$930,000 50%=$ 465,000

STOCK90,000AFTER TAX $

COMP SHIFT375,000PRE-TAX $

6.0% =$5478.08 PER MONTH FOR 72 MONTHS

NET INCOME100,000

ADD: SALARIES AND FRINGE BENEFITS OF OWNER DRS511,846

COMPENSATION POOL611,846

ALLOCATION OF COMPENSATION POOL:SENIORJUNIORTOTAL

70% COMP POOL X NET PRODUCTION %266,104162,188428,29270.00%

30% COMP POOL X OWNERSHIP $91,77791,777183,55430.00%

TOTAL COMPENSATION357,881253,965611,846100.00%

COMP SHIFT (5478.08/MO)65,738(65,738)0

NET EARNED423,619188,227611,846

LESS: SALARIES PAID300,000150,000450,000

AUTO EXPENSES1,00001,000

DUES AND JOURNALS1,6121,3012,913

OFFICERS LIFE INS1,07201,072

TELEPHONE5960596

MEDICAL INS18,00010,00028,000

PROF FEES000

CONTINUING EDUCATION3,2005653,765

PROFIT SHARING/401K24,500024,500

TOTAL SALARIES AND FRINGES349,980161,866511,846

BALANCE OF COMP DUE (OVER)-CURRENT73,63926,361100,000

BALANCE OF COMP DUE (OVER) FROM PRIOR YR000

COMPENSATION DUE (OVERPAID)73,63926,361100,000

Stock Payment90,0006 yr 7%

1534.41/mo18,412

SENIORJUNIORTOTAL

GROSS PRODUCTION 750,000450,0001,200,000

LESS: LAB FEES PAID (65,000)(32,500)(97,500)

NET PRODUCTION685,000417,5001,102,500

PERCENT OF NET PRODUCTION62.13%37.87%100.00%

PERCENT OF OWNERSHIP50.00%50.00%100.00%

MET HOD 1 - ASSET VAL UE L ow High

Dental equipment - $200,000 $200,000Office equipment and furniture 10,500 10,500Leasehold improvements 20,000 20,000Dental supplies & hand instruments 15,000 15,000Patient records/goodwill 550,000 840,000T otal value $795,500 $1,085,500

PAINLESS DENTISTRY, DDS, PAEstimate of Practice Value

December 31, 201X


Sheet1



December 31, 201X

METHOD 1 - ASSET VALUELowHigh

Dental equipment -$200,000$200,000

Office equipment and furniture10,50010,500

Leasehold improvements20,00020,000

Dental supplies & hand instruments15,00015,000

Patient records/goodwill550,000840,000

Total value$795,500$1,085,500

MET HOD 2 - ANNUAL I ZED NET PRODUCT I ON (Weighted Ave)

12/31/xx $1,100,000 times 1 $1,100,00012/31/xy 1,350,000 times 2 $2,700,0001231/xz 1,530,000 times 3 $4,590,000

6 $8,390,000

divide by 6 $1,398,333


T otal value $769,083 $1,048,75055% 75%

December 31, 201X



Sheet1



December 31, 201X

METHOD 2 - ANNUALIZED NET PRODUCTION (Weighted Ave)

12/31/xx$1,100,000times 1$1,100,000

12/31/xy1,350,000times 2$2,700,000

1231/xz1,530,000times 3$4,590,000

6$8,390,000

divide by 6$1,398,333


Total value$769,083$1,048,750

55%75%


December 31, 201X

METHOD 3 - CAPITALIZED EARNINGS

Average annual net production (from above) $1,398,333 Less: Average operating expenses 60% (839,000)

Professional labor (35% of net Dr.prod after lab) (323,000)Equipment contribution (25,000)

Excess Earnings $211,333

Capitalization Rate 25% 20%

(4 times) (5 times)

Total value $845,332 $1,056,665



December 31, 201X

METHOD 4 - ANNUALIZED EARNINGS Low High

Total earnings (amt available for doctors)12/31/xx $420,000 12/31/xy $520,000 12/31/xz $610,000

Total earnings for the above years $1,550,000

div by 3

Average annual earnings $520,000 1.5 2

Total value $780,000 $1,040,000



December 31, 201X

Average value of the four methods presentedMethod 1 $795,500 $1,085,500 Method 2 769,083 1,048,750 Method 3 845,332 1,056,665 Method 4 780,000 1,040,000

Total of the four methods presented $3,189,915 $4,230,915

div by 4 div by 4

Average of the above valuation methods $797,479 $1,057,729

Calculated value (average of low & high) $927,604

Other Balance Sheet items at 12/31/0xCashAccounts receivable

$20,000110,000

Accounts payable (2,500)Payroll withholdings payable (7,500)Notes payable (100,000)Current year profit 0 Net total $20,000

Net value $947,604 Net value-rounded $948,000


— Growth vs. decline (production, new patients, etc.)— Sustainability – patient base— Asset purchase vs. stock purchase— Support from outgoing Dr.— A/R collection rate pre and post COVID (note A/R typically is not

sold to buyer)— Potential appointment backlog due to closure – bounce back plan in

place?— 3 & 6 month projections, highlighting expected collections &

expenses reduced

Other considerations

— Bank financing could be uncertain; banks don’t know what their rules will be yet

— Validity of active patient counts— Contingent or earn out-type clauses for transactions— Recruiting and staffing— Cost of PPE— Coding and billing

Other considerations (cont.)

— Appointment times under new rules— Valuation as noted and uncertainty— Will buyers be willing to accept new risks? Will sellers be willing to

share risk? New compromise— Staffing variables – more assistants needed?— Front desk environment (no contact, remote payment acceptance)— New systems / processes— Retirements and recruiting

Other considerations (cont.)

— Bank financing (updated PFS, new loan programs from SBA)— How long before back to “normal” – 3 / 6 / 12 months?— What will the new normal be?

— Owner holdback (Contingencies, sharing risk)— Deferred compensation – internally financed

Financing considerations

ADAPT Coffee Talk featuring �Baker Tilly��Selling your practice in the COVID-19 era: advice from accounting experts��May 15, 2020To see a list of future �ADAPT Coffee Talk events �and to register, visit:AgendaToday’s presentersSlide Number 5Dental specializationOffice and procedural policies to evaluate and updateOffice and procedural policies to evaluate and update (cont.)Documents to prepare or update for prospective buyersDocuments to prepare for prospective buyers (cont.)Documents to prepare for prospective buyers (cont.)Practice Valuation ConceptsPractice Valuation ConceptsPractice Valuation ConceptsPractice Valuation ConceptsPractice Valuation ConceptsPractice Valuation ConceptsPractice Valuation ConceptsOther considerationsOther considerations (cont.)Other considerations (cont.)Financing considerationsThank you!Looking to sell?